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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_____________
COMMISSION FILE NUMBER 000-25617
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VALLEY MEDIA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2556440
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</TABLE>
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1280 SANTA ANITA COURT, WOODLAND, CALIFORNIA 95776
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (530) 661-6600
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the Registrant's common stock as of
October 29, 1999 was 8,454,707 shares.
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VALLEY MEDIA, INC.
INDEX
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<CAPTION>
PAGE
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<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 2, 1999 and
April 3, 1999............................................. 3
Consolidated Statements of Operations for the thirteen and
twenty-six weeks ended October 2, 1999 and September 26,
1998...................................................... 4
Consolidated Statements of Cash Flows for the twenty-six
weeks ended October 2, 1999 and September 26, 1998........ 5
Notes to Consolidated Financial Statements.................. 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Item 2.
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 19
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 19
Item 2. Changes in Securities and Use of Proceeds................... 19
Item 3. Defaults Upon Senior Securities............................. 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Item 5. Other Information........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
SIGNATURES.......................................................................... 21
</TABLE>
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALLEY MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 2, APRIL 3,
1999 1999
----------- ---------
<S> <C> <C>
DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA
ASSETS
Current assets
Cash...................................................... $ 382 $ 1,433
Accounts receivable, less allowance for doubtful accounts
of $9,415 at October 2, 1999 and $8,892 at April 3,
1999.................................................... 162,386 167,925
Inventories, net of reserves of $3,104 at October 2, 1999
and $2,823 at
April 3, 1999........................................... 220,545 216,807
Deferred income taxes..................................... 5,956 5,956
Prepaid expenses and other................................ 1,588 1,551
-------- --------
Total..................................................... 390,857 393,672
Property and equipment, net................................. 28,328 20,913
Goodwill and other intangibles, net......................... 13,942 14,678
Deferred income taxes....................................... 399 399
Other assets................................................ 1,525 1,063
-------- --------
Total assets................................................ $435,051 $430,725
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $183,279 $191,978
Accrued liabilities....................................... 6,666 11,534
Revolving line of credit.................................. 162,060 148,730
Current portion of long-term debt......................... 4,036 1,905
Deferred income taxes..................................... 3,918 3,918
-------- --------
Total................................................... 359,959 358,065
-------- --------
Deferred income taxes....................................... 2,855 2,855
Long-term debt.............................................. 6,673 3,918
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued.................................
Common stock, $.001 par value, 20,000,000 shares
authorized, 8,454,707 and 8,449,009 shares issued and
outstanding............................................. 8 8
Additional paid-in capital................................ 52,169 52,145
Stockholders' notes receivable............................ (243) (360)
Retained earnings......................................... 13,630 14,094
-------- --------
Total stockholders' equity.............................. 65,564 65,887
-------- --------
Total liabilities and stockholders' equity.................. $435,051 $430,725
======== ========
</TABLE>
See notes to consolidated financial statements.
3
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VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Net sales................................... $ 205,186 $ 188,978 $ 390,952 $ 343,351
Cost of goods sold.......................... 180,648 167,982 344,543 305,405
---------- ---------- ---------- ----------
Gross profit................................ 24,538 20,996 46,409 37,946
Selling, general and administrative
expenses.................................. 20,808 17,409 40,881 34,143
---------- ---------- ---------- ----------
Operating income............................ 3,730 3,587 5,528 3,803
Interest expense............................ 3,157 2,682 6,321 4,767
---------- ---------- ---------- ----------
Income (loss) before income taxes........... 573 905 (793) (964)
Income tax provision (benefit).............. 238 490 (329) (117)
---------- ---------- ---------- ----------
Income (loss) before extraordinary loss..... 335 415 (464) (847)
Extraordinary loss (net of income taxes of
$477)..................................... (723)
---------- ---------- ---------- ----------
Net income (loss)........................... $ 335 $ 415 $ (464) $ (1,570)
========== ========== ========== ==========
Net income (loss) per share:
Basic:
Income (loss) before extraordinary loss... $ 0.04 $ 0.09 $ (0.05) $ (0.17)
Extraordinary loss........................ (0.15)
---------- ---------- ---------- ----------
Net income (loss) per share............... $ 0.04 $ 0.09 $ (0.05) $ (0.32)
========== ========== ========== ==========
Diluted:
Income (loss) before extraordinary loss... $ 0.04 $ 0.07 $ (0.05) $ (0.17)
Extraordinary loss........................ (0.15)
---------- ---------- ---------- ----------
Net income (loss) per share............... $ 0.04 $ 0.07 $ (0.05) $ (0.32)
========== ========== ========== ==========
Weighted average shares used in the
calculation:
Basic..................................... 8,451,904 4,842,709 8,450,457 4,832,460
========== ========== ========== ==========
Diluted................................... 9,144,982 5,540,641 8,450,457 4,832,460
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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VALLEY MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
----------------------------
OCTOBER 2, SEPTEMBER 26,
1999 1998
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<S> <C> <C>
DOLLARS IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before extraordinary loss............................ $ (464) $ (847)
Adjustments to reconcile loss before extraordinary loss to
net cash used in operating activities:
Depreciation and amortization............................. 3,234 2,554
Bad debt expense.......................................... 523 1,574
Extraordinary loss on debt refinancing.................... (723)
Changes in assets and liabilities:
Accounts receivable..................................... 4,102 (39,885)
Inventories............................................. (2,535) (64,198)
Prepaid expenses and other.............................. (152) (331)
Accounts payable........................................ (9,314) 54,047
Accrued liabilities..................................... (4,648) (1,986)
--------- ---------
Net cash used in operating activities................. (9,254) (49,795)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (10,072) (6,882)
Other..................................................... (82)
--------- ---------
Net cash used in investing activities................. (10,154) (6,882)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings under revolving line of credit...... 393,865 357,710
Repayment of short-term borrowings........................ (380,535) (301,744)
Issuance of long-term debt................................ 6,080 1,806
Repayment of long-term debt............................... (1,194) (693)
Issuance of common stock.................................. 24
Repayment of stockholder note receivable.................. 117
--------- ---------
Net cash provided by financing activities............. 18,357 57,079
--------- ---------
NET INCREASE (DECREASE) IN CASH........................... (1,051) 402
CASH, BEGINNING OF PERIOD................................. 1,433 394
--------- ---------
CASH, END OF PERIOD....................................... $ 382 $ 796
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Valley Media, Inc. and
its subsidiaries (the "Company") are unaudited and reflect all normal, recurring
adjustments that, in the opinion of management, are necessary for a fair
presentation of such financial statements. The Company's interim results are not
indicative of results for a full year.
These unaudited consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended April 3, 1999.
2. RELATED PARTY TRANSACTIONS
On July 2, 1999, the Company, Valley Entertainment, Inc. ("VE"), and Barnet
J. Cohen, the Company's founder, largest stockholder and the Chairman of the
Company's Board of Directors, entered into a Contribution Agreement (the
"Contribution Agreement"). Pursuant to the Contribution Agreement, Mr. Cohen who
is the President and Chief Executive Officer of VE, contributed $1,320,000 in
cash in exchange for 66 percent of VE's outstanding common stock. Other
individuals contributed $300,000 in cash in exchange for a total of 15 percent
of VE's outstanding common stock. The Company assigned the net assets of its
Valley Entertainment division to VE in exchange for a cash payment of $486,000
and 19 percent of VE's outstanding common stock. The Company did not recognize
any gain or loss on the transaction. The Company uses the equity method to
account for its investment in VE.
3. LONG-TERM DEBT
During the thirteen weeks ended October 2, 1999, the Company entered into
various credit agreements providing for equipment financing with terms of three
to six years and interest rates ranging from 8.1% to 8.9%. The credit agreements
are secured by various pieces of warehouse equipment, office furniture, and
computer equipment. The credit agreements contain various covenants including,
among other things, compliance with minimum tangible net worth, minimum coverage
ratio, and maximum total liabilities to equity ratio requirements. As of
October 2, 1999, the Company was in compliance with all covenants. During the
thirteen weeks ended October 2, 1999, approximately $3.1 million was funded
under the credit agreements, while another $3.0 million was funded on
October 29, 1999. Funds were primarily used to refinance equipment previously
purchased using the Company's revolving line of credit.
4. EXTRAORDINARY LOSS
As a result of terminating a prior line of credit agreement in the first
quarter of fiscal 1999, the Company incurred termination fees and wrote off
prepaid financing costs resulting in an extraordinary loss of $723,000 (net of
income tax benefit of $477,000) or $0.15 per diluted share.
5. SEGMENT INFORMATION
Management has determined that there are three reportable segments based on
the customers served by each segment: Full-line Distribution, New Media and
Independent Distribution. Such determination was based on the level at which
executive management reviews the results of operations in order to make
decisions regarding performance assessment and resource allocation.
6
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VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. SEGMENT INFORMATION (CONTINUED)
Full-line Distribution serves music, video and other retailers worldwide
with customers ranging from independent stores to specialty chains to retailers
who sell music and video as an ancillary product line. New Media provides
product, data, and value-added services to internet retailers. Independent
Distribution serves independent labels and studios. Independent Distribution
sells products to Full-line Distribution and New Media at market price, and
accordingly, the intersegment revenues are included in "intersegment
eliminations" in the reconciliation of operating income reported below.
Expenses of the communications and marketing, distribution, information
systems, finance and administrative groups are not allocated to the operating
segments and are included in "other" in the reconciliation of operating income
reported below. The Company does not allocate interest expense, income taxes or
extraordinary items to operating segments. The Company does not identify and
allocate assets or depreciation by operating segment.
Information on reportable segments is as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
FULL-LINE DISTRIBUTION
Net sales.................................... $132,399 $150,117 $248,655 $274,913
Operating income............................. $ 11,518 $ 11,601 $ 20,353 $ 19,711
NEW MEDIA
Net sales.................................... $ 56,727 $ 29,481 $115,872 $ 51,131
Operating income............................. $ 6,987 $ 4,151 $ 14,269 $ 7,613
INDEPENDENT DISTRIBUTION
Net sales.................................... $ 19,368 $ 13,252 $ 33,359 $ 25,835
Operating income............................. $ 2,608 $ 1,346 $ 4,635 $ 2,687
OTHER
Unallocated expenses......................... $(17,383) $(13,511) $(33,729) $(26,208)
INTERSEGMENT ELIMINATIONS
Net sales.................................... $ (3,308) $ (3,872) $ (6,934) $ (8,528)
TOTAL
Net sales.................................... $205,186 $188,978 $390,952 $343,351
Operating income............................. $ 3,730 $ 3,587 $ 5,528 $ 3,803
</TABLE>
6. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income (loss) by
the weighted average number of shares outstanding during the period. Diluted net
income (loss) per share is computed by adjusting the weighted average number of
shares outstanding during the period for all potentially dilutive shares
outstanding during the period. Net loss and weighted average shares outstanding
used for computing diluted loss per share were the same as that used for
computing basic loss per share for the twenty-six week periods ended October 2,
1999 and September 26, 1998. Stock options outstanding
7
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VALLEY MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. EARNINGS PER SHARE (CONTINUED)
to purchase 804,592 and 623,087 shares of common stock during the twenty-six
week periods ended October 2, 1999 and September 26, 1998, respectively, were
not included in the computation of diluted net loss per share since the
inclusion of such shares would be antidilutive.
7. NEW ACCOUNTING PRONOUNCEMENT
SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures these
instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is currently evaluating
what impact, if any, SFAS No. 133 may have on its financial statements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales for the thirteen and twenty-six weeks of fiscal year 2000 and 1999.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Gross profit.................................... 12.0 11.1 11.9 11.1
Selling, general and administrative expenses.... 10.1 9.2 10.5 9.9
Operating income................................ 1.8 1.9 1.4 1.1
Income (loss) before extraordinary loss......... 0.2 0.2 (0.1) (0.2)
Net income (loss)............................... 0.2% 0.2% (0.1)% (0.5)%
</TABLE>
The following table sets forth certain supplemental data for the thirteen
and twenty-six weeks of fiscal year 2000 and 1999.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1999 1998 1999 1998
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
SUPPLEMENTAL DATA
EBITDA.......................................... $5,398 $4,927 $8,763 $6,357
EBITDA as a percentage of net sales............. 2.6% 2.6% 2.2% 1.9%
</TABLE>
- ------------------------
EBITDA represents earnings before interest, income taxes and depreciation and
amortization. We believe that EBITDA is a useful measure of our financial
performance. However, EBITDA should not be construed as an alternative to
operating income, net income or cash flows from operations as determined in
accordance with generally accepted accounting principles
THIRTEEN WEEKS ENDED OCTOBER 2, 1999 COMPARED WITH THIRTEEN WEEKS ENDED
SEPTEMBER 26, 1998
Our net sales increased $16.2 million, or 9%, from $189.0 million in the
thirteen weeks ended September 26, 1998 to $205.2 million in the thirteen weeks
ended October 2, 1999.
Full-line Distribution sales decreased $17.7 million, or 12%, from
$150.1 million in the second quarter of fiscal 1999 to $132.4 million in the
second quarter of fiscal 2000. Full-line non-DVD video sales decreased by
$31.5 million primarily as a result of a weak video release schedule in the
second quarter of fiscal 2000 compared to the second quarter of fiscal 1999. In
particular, the hit video title TITANIC was released in the second quarter of
fiscal 1999 and generated net sales of approximately $21 million. Partially
offsetting this were increases in Full-line DVD video sales and audio sales of
$4.2 million and $9.6 million, respectively, during the second quarter of fiscal
2000 compared to the second quarter of fiscal 1999 resulting from sales to new
customers and sales growth among existing customers.
New Media sales increased $27.2 million, or 92%, from $29.5 million in the
second quarter of fiscal 1999 to $56.7 million in the second quarter of fiscal
2000 due to increased sales by our on-line customers in connection with the
general growth of e-commerce sales and the addition of new customers acquired by
the continuous outreach efforts of our New Media sales force. Although the
growth in our New Media sales continues to be substantial, we expect the rate of
such growth to decline from the phenomenal growth rates we have experienced in
prior periods.
Independent Distribution sales increased $6.1 million, or 46%, from
$13.3 million in the second quarter of fiscal 1999 to $19.4 million in the
second quarter of fiscal 2000 due to the acquisition of new labels and
successful marketing of existing labels and artists, and a strong new release
schedule.
9
<PAGE>
Our gross profit increased $3.5 million, or 17%, from $21.0 million in the
second quarter of fiscal 1999 to $24.5 million in the second quarter of
fiscal 2000, with gross margin increasing from 11.1% to 12.0%. Margins increased
primarily due to the shift in sales mix from Full-line Distribution to higher
gross profit segments of New Media and Independent Distribution, and within
Full-line video distribution from sell-through video new releases to catalog
items. We expect gross margin percentages to decline in the quarters ahead. In
the near term, we expect product mix to shift back to a proportionately higher
volume of new releases and customer mix to shift back to a proportionately
higher volume of sales to larger customers. We have recently entered into
long-term contracts with major customers who, as a result of their growth, have
negotiated agreements with us at lower margins. As a result of these factors, we
expect our gross margins to decrease as a percentage of sales during the second
half of fiscal 2000 as compared to the same period during fiscal 1999.
Selling, general and administrative expenses increased $3.4 million, or 20%,
from $17.4 million in the second quarter of fiscal 1999 to $20.8 million in the
second quarter of fiscal 2000, primarily as a result of:
- sales growth;
- shift in sales mix to more labor intensive New Media business;
- costs associated with the move of the Company's Woodland, California
distribution facility (WDC) to a new and larger warehouse;
- increased rent expense as a result of the new WDC;
- increased depreciation and amortization, primarily due to the further
enhancement of our infrastructure; and
- higher wages as a result of tight labor markets.
Selling, general and administrative expenses as a percentage of sales
increased from 9.2% in the second quarter of fiscal 1999 to 10.1% in the second
quarter of fiscal 2000. As a result of the factors set forth in the preceding
paragraph, we expect our selling, general and administrative expenses to
increase as a percentage of sales during the second half of fiscal 2000 as
compared to the same period during fiscal 1999.
Interest expense increased $0.5 million, or 19%, from $2.7 million in the
second quarter of fiscal 1999 to $3.2 million in the second quarter of
fiscal 2000 primarily due to increases in working capital associated with higher
inventory levels, a higher level of unprocessed customer returns due to issues
related to the California warehouse move, and investment in infrastructure.
Partially offsetting these factors was a reduction of our average interest rate
from 9.2% in second quarter of fiscal 1999 to 7.9% in the second quarter of
fiscal 2000, and proceeds received from the initial public offering (IPO).
Our effective tax rate was 41.5% in the second quarter of fiscal 2000 based
upon our estimated annual rate for fiscal 2000. Our effective tax rate was 54.1%
in the second quarter of fiscal 1999 reflecting the effects of a true-up of
prior year tax returns.
Net income decreased $80,000, or 19%, from $415,000 in the second quarter of
fiscal 1999 to $335,000 in the second quarter of fiscal 2000.
TWENTY-SIX WEEKS ENDED OCTOBER 2, 1999 COMPARED WITH TWENTY-SIX WEEKS ENDED
SEPTEMBER 26, 1998
Our net sales increased $47.6 million, or 14%, from $343.4 million in the
twenty-six weeks ended September 26, 1998 to $391.0 million in the twenty-six
weeks ended October 2, 1999.
Full-line Distribution sales decreased $26.2 million, or 10%, from
$274.9 million in the first half of fiscal 1999 to $248.7 million in the first
half of fiscal 2000. Full-line non-DVD video sales decreased by
10
<PAGE>
$51.7 million primarily due to a weak new release schedule in the first and
second quarters of fiscal 2000 compared to the first and second quarters of
fiscal 1999. In particular, the hit video title TITANIC was released in the
second quarter of fiscal 1999 and generated net sales of approximately
$21 million. Partially offsetting this were increases in Full-line DVD video
sales and audio sales of $7.4 million and $18.1 million, respectively, resulting
from sales to new customers and sales growth among existing customers. The
decrease is also due to inefficiencies experienced early in the first quarter in
moving the California distribution center to a nearby facility, which adversely
affected our sales.
New Media sales increased $64.8 million, or 127%, from $51.1 million in the
first half of fiscal 1999 to $115.9 million in the first half of fiscal 2000 due
to increased sales by our on-line customers in connection with the general
growth of e-commerce sales and the addition of new customers acquired by the
continuous outreach efforts of our New Media sales force. Our New Media sales
were adversely affected during the first quarter of fiscal 2000 by the
relocation of our California distribution center. For the reasons set forth
above, we expect the rate of growth of our New Media sales to decline in the
quarters ahead.
Independent Distribution sales increased $7.6 million, or 29%, from
$25.8 million in the first half of fiscal 1999 to $33.4 million in the first
half of fiscal 2000 due to the acquisition of new labels and successful
marketing of existing labels and artists, and a strong new release schedule.
Our gross profit increased $8.5 million, or 22%, from $37.9 million in the
first half of fiscal 1999 to $46.4 million in the first half of fiscal 2000,
with gross margin increasing from 11.1% to 11.9%. Margins increased primarily
due to the shift in sales mix from Full-line Distribution to higher gross profit
segments of New Media and Independent Distribution, and within Full-line video
distribution from sell-through video new releases to catalog items. We expect
gross margin percentages to decline in the quarters ahead, primarily as a result
of the factors discussed above.
Selling, general and administrative expenses increased $6.8 million, or 20%,
from $34.1 million in the first half of fiscal 1999 to $40.9 million in the
first half of fiscal 2000, primarily as a result of the factors discussed above.
Selling, general and administrative expenses as a percentage of sales
increased from 9.9% in the first twenty-six weeks of fiscal 1999 to 10.5% in the
first twenty-six weeks of fiscal 2000. For the reasons set forth above, we
expect our selling, general and administrative expenses to increase as a
percentage of sales during the second half of fiscal 2000.
Interest expense increased $1.5 million, or 31%, from $4.8 million in the
first half of fiscal 1999 to $6.3 million in the first half of fiscal 2000
primarily due to increases in working capital associated with higher sales and
inventory levels, a higher level of unprocessed customer returns due to issues
related to the California warehouse move, and investment in systems and
infrastructure. Partially offsetting these factors was a reduction of our
average interest rate from 9.1% in first half of fiscal 1999 to 7.8% in the
first half of fiscal 2000, and proceeds received from the IPO.
Our effective tax rate was 41.5% in the first half of fiscal 2000 based upon
our estimated annual rate for fiscal 2000.
In May 1998, termination fees from refinancing our revolving credit facility
resulted in an extraordinary loss of $723,000 (net of income taxes).
Net loss decreased $1,106,000 from $1,570,000 in the first half of fiscal
1999 to $464,000 in the first half of fiscal 2000.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements relate primarily to working capital, the expansion
of our infrastructure to accommodate sales growth, and the funding of
acquisitions. Our working capital needs are seasonal and typically peak in the
third and fourth fiscal quarters due to increases in inventories purchased for
the holiday selling season and extension of credit terms to certain customers.
We maintain significant inventory levels to fulfill our operating commitment to
carry a deep catalog of music and video stock keeping units. Inventories
generally can be returned to suppliers.
Net cash used in operating activities of $9.3 million in the first half of
fiscal 2000 consisted primarily of decreases of $9.3 million in accounts payable
and $4.6 million in accrued liabilities and an increase of $2.5 million in
inventories, offset by a decrease in accounts receivable of $4.1 million. Net
cash used in operating activities of $49.8 million in the first half of fiscal
1999 was primarily attributable to increases of $64.2 million and $39.9 million
in inventories and accounts receivable, respectively, offset by an increase in
accounts payable of $54.0 million.
Net cash used in investing activities was $10.2 million and $6.9 million for
the first half of fiscal 2000 and 1999, respectively. Cash used in the first
half of fiscal 2000 consisted of expenditures for property and equipment
acquisitions, primarily related to the new California distribution facility and
investments in information systems technology. Cash used in the first half of
fiscal 1999 consisted of expenditures for property and equipment acquisitions,
primarily in connection with the opening of the Louisville Distribution Center.
Cash used for the purchase of property and equipment has increased because of
increasing investments in equipment and technology required to facilitate
overall sales growth.
Financing activities provided net cash of $18.4 million in the first half of
fiscal 2000 and $57.1 million in the first half of fiscal 1999. Cash provided by
financing activities in the first quarter of fiscal 2000 and fiscal 1999
consisted primarily of additional borrowings under our credit facility to fund
increased working capital requirements. Cash provided by financing activities in
the first half of fiscal 2000 also included $6.1 million related to the issuance
of notes payable for the purchase of certain equipment.
Our credit facility provides for borrowings up to the lesser of
$200 million or the amount of collateral availability. Collateral availability
is limited to certain percentages of eligible inventory, accounts receivable and
equipment, subject to certain limitations as to video and DNA inventories and
equipment. The credit facility bears interest, at our election, at either the
prime rate plus a margin of (0.25)% to 0.5% or the Eurodollar Rate plus a margin
of 2.0% to 2.75%, subject to monthly adjustments and certain terms and
conditions as stated in the credit facility.
Borrowings under the credit facility are secured by all accounts receivable,
inventory, certain equipment and other intangible property. The credit facility
expires on May 21, 2001 and renews annually thereafter unless notice of
termination is given by either party. The credit facility contains various
financial covenants, including limitations on payment of cash dividends and
redemptions.
We believe that our borrowing availability under the credit facility will be
sufficient to meet our operating and capital requirements through fiscal 2000.
Our future operating and capital requirements, however, will depend on numerous
factors, including growth of the business, additional infrastructure needs,
potential acquisitions and/or joint ventures and future results of operations.
SEASONALITY IN OPERATING RESULTS
Our quarterly net sales and operating results have varied significantly in
the past and will likely continue to do so in the future as a result of seasonal
variations in the demand for music and video. Historically, our sales are
highest during the third fiscal quarter (the holiday season) and returns are
highest during the fourth fiscal quarter. Due to this seasonality, we typically
experience significant
12
<PAGE>
changes in cash flows and capacity needs during the year, with the heaviest
credit needs and highest capacity requirements typically occurring during the
third and fourth fiscal quarters.
YEAR 2000 MATTERS
The year 2000 issue has arisen as a result of computer programs being
written using two digits rather than four to define the applicable year. Certain
information technology systems and their associated software, and certain types
of equipment that use programmable logic chips to control aspects of their
operation, commonly referred to as embedded chip equipment, may recognize "00"
as a year other than the year 2000. Some information technology systems and
embedded chip equipment used by us and by third parties that do business with us
contain two-digit programming to define a year. The year 2000 issue could
result, for us and for others, in system failures or miscalculations, which
could cause disruptions of operations, including, among other things, a
temporary inability to process transactions or to engage in other normal
business activities.
READINESS FOR YEAR 2000
We are addressing year 2000 issues relating to:
- information technology systems and embedded chip equipment used by us;
- third parties who do business with us that are not prepared for the year
2000; and
- contingency planning.
We use a variety of information technology systems, internally developed and
third party provided software and embedded chip equipment. For these information
technology systems, software and embedded chip equipment, we have divided our
year 2000 efforts into four phases:
(1) identification and inventorying of information technology systems and
embedded chip equipment with potential year 2000 problems;
(2) evaluation of scope of year 2000 issues for, and assigning priorities
to, each item based on its importance to our operations;
(3) remediation of year 2000 issues in accordance with assigned priorities,
by correction, upgrade, replacement or retirement; and
(4) testing for and validation of year 2000 compliance on an application
basis.
We have categorized as "mission critical" those information technology
systems and embedded chip equipment whose failure would result in cessation of
operations or significant detrimental financial impact on us. Phases (1) and
(2) are complete across all "mission critical" business functions and locations.
Phases (3) and (4) are substantially complete across all mission critical
information technology systems and embedded chip equipment.
Our operations are also dependent on the year 2000 readiness of third
parties that do business with us. In particular, our information technology
systems interact with commercial electronic transaction processing systems of
customers. In addition, we are dependent on third-party suppliers of
infrastructure elements such as telecommunications services, electric power,
water and banking facilities. We do not depend to any significant degree on any
single merchandise supplier or upon electronic transaction processing with
individual suppliers for merchandise purchases.
We have identified and initiated formal communications with key third
parties to determine the extent to which we will be vulnerable to such parties'
failure to resolve their own year 2000 issues. As a follow-up, we plan to
determine whether our customers and suppliers are taking appropriate steps to
achieve year 2000 readiness and ensure continued functioning in accordance with
our business needs.
13
<PAGE>
We are assessing our risks with respect to failure by third parties to be
year 2000 compliant and intend to seek to mitigate those risks. We are also
developing contingency plans, discussed below, to address issues related to
third parties we determine are not making sufficient progress toward becoming
year 2000 compliant.
COSTS
As of October 2, 1999, our information technology systems and embedded chip
equipment are substantially year 2000 compliant. Aggregate costs for work
related to year 2000 efforts currently are anticipated to total approximately
$1.6 million. Costs of approximately $200,000 were incurred and expensed in the
first half of both fiscal 2000 and fiscal 1999.
Of the remaining portion of our aggregate estimated year 2000 costs,
approximately $600,000 will be incurred in the remaining quarters of fiscal
2000. Approximately $200,000 of these costs is expected to be for capital
investments in new systems and applications. We anticipate that 3% of our fiscal
2000 information technology budget will be used for year 2000 remediation. We
anticipate our remaining year 2000 costs will be incurred in the following
estimated percentages among the following types of remediation:
- 42% on modifications to existing software;
- 24% on conversions to new software; and
- 34% on remediation of embedded chip equipment.
Certain information technology projects have been deferred and will continue
to be deferred as a result of the personnel we are devoting to our year 2000
remediation efforts. These projects relate to potential operational enhancements
such as additional value-added services and cost cutting projects. We do not
believe that the delay in these information technology projects will have a
material adverse affect on our financial condition or results of operations.
Our estimate of the costs of achieving year 2000 compliance and the date by
which year 2000 compliance will be achieved are based on our best estimates,
which were derived using numerous assumptions about future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no assurance that these estimates will be
achieved, and actual results could differ materially from these estimates.
Specific facts that might cause such material differences include the
availability and cost of personnel trained in year 2000 remediation work, the
ability to locate and correct all relevant computer codes, the success achieved
by our customers and suppliers in reaching year 2000-readiness, the timely
availability of necessary replacement items and similar uncertainties.
RISKS
We expect to implement the changes necessary to address the year 2000 issue
for information technology systems and embedded chip equipment we use. We
presently believe that, with modifications to existing software, conversions to
new software, and appropriate remediation of embedded chip equipment, the
year 2000 issue with respect to our information technology systems and embedded
chip equipment is not reasonably likely to pose significant operational problems
for us. However, if unforeseen difficulties arise, such modifications,
conversions and replacements are not completed timely, or our customers' or
suppliers' systems are not modified to become year 2000 compliant, the
year 2000 issue may have a material impact on our results of operations and
financial condition.
Presently, we are unable to assess the likelihood that we will experience
significant operational problems due to unresolved year 2000 problems of third
parties that do business with us. Although we have not been put on notice that
any known third party problem will not be timely resolved, we have
14
<PAGE>
limited information. No assurance can be made concerning the year 2000 readiness
of third parties. The resulting risks to our business are very difficult to
assess due to the large number of variables involved.
If third parties fail to achieve year 2000 compliance, year 2000 problems
could have a material impact on our operations. Similarly, there can be no
assurance that we can timely mitigate the risks related to a third party's
failure to resolve its year 2000 issues. If such mitigation is not achievable,
year 2000 problems could have a material impact on our operations.
The worst case year 2000 scenarios that we believe are reasonably likely to
occur would involve:
- disruption in utilities, transportation and communications; and
- disruption to commerce between us and third parties.
CONTINGENCY PLANS
We presently believe that the most reasonably likely worst-case year 2000
scenarios would relate to the possible failure in one or more geographic regions
of third party systems over which we have no control and for which we have no
ready substitute, such as, but not limited to, power and telecommunications
services. We have in place a business resumption plan that addresses recovery
from various kinds of disasters, including recovery from significant
interruptions to data flows and distribution capabilities at our major data
systems centers and major distribution centers. We are using that plan as a
starting point for developing specific year 2000 contingency plans, which will
emphasize locating alternate sources of supply, methods of distribution and ways
of processing information.
We anticipate this contingency planning will prepare our business for
disruptions but will not protect us fully from commercial impact. We have
undertaken the following efforts:
- prioritizing all hardware, software and services across the enterprise;
and
- developing contingency plans for top priority items, including:
- building an inventory of hardware and spare parts;
- procurement of generators;
- identification of alternatives for transportation of product and
communications with business partners; and
- increasing staff on call and on the job at the end of 1999 and
beginning of 2000.
As of October 2, 1999, our year 2000 contingency plans have been
substantially completed.
FACTORS AFFECTING OPERATING RESULTS
This report contains forward-looking statements made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These statements are identified by words such as "will", "expects",
"anticipates", "plans", or "intends" and by other descriptions of future
circumstances or conditions. Actual results may differ materially from those
projected in these forward-looking statements. Factors that could cause
differences include, but are not limited to, those discussed below.
WE MAY BE UNABLE TO COMPETE WITH OTHER BUSINESSES THAT OFFER SIMILAR
PRODUCTS AND SERVICES
The full-line distribution of music and video is an intensely competitive
business. We compete with national, regional and local full-line distributors,
including Alliance Entertainment Corp. and Ingram Entertainment. As a result of
such competition, we could experience pricing pressures or lose customers
altogether. Either event would adversely affect our financial results.
15
<PAGE>
In addition, the major labels, major studios and independent distribution
companies sell substantial amounts of their products directly to retailers.
However, to date they have not focused, to the same extent we have, on
fulfilling the needs of smaller independent stores or providing value-added
services. If the major labels, major studios or independent distribution
companies start providing more responsive service to underserved retail segments
or value-added services at competitive costs, our financial results could be
adversely affected. We also compete with several vendor managed inventory firms,
including two national vendor managed inventory firms that we believe have
greater revenues than us.
From time to time, several of our retail chain customers have chosen to buy
a substantial volume of their inventory directly from the major labels and
studios that they had previously been purchasing from us. To the extent that our
customers increase their direct purchasing from the major labels and studios or
the independent distribution companies, our financial results could be adversely
affected.
In addition to competition from existing competitors, in the future we could
face competition from new competitors that may enter the business. If new
competitors enter the music and video distribution business, our financial
results could be adversely affected.
Our existing New Media competitors include Alliance Entertainment Corp.,
Baker & Taylor and Ingram Entertainment. Other distributors have announced an
interest in starting to service the on-line market. If one or more of the
leading on-line retailers that we service buys more of its inventory directly
from a label or studio or through an alternative distributor, our financial
results could be adversely affected. Amazon.com, one of our largest New Media
customers, has increased, and may continue to increase, the proportion of
product it buys directly from the labels and studios. In addition, to the extent
our Internet customers utilize fewer value-added services, such as
direct-to-consumer fulfillment and data, our financial results could also be
adversely affected.
Distribution North America competes with several other independent
distribution companies. Some of these competitors conduct distribution
operations equal to or larger than Distribution North America and others operate
in niche markets. We also compete with several of the major labels' own
independent distribution groups. In addition, as a label or artist gains in
popularity, Distribution North America faces new competition from the major
labels to retain distribution rights for that label or artist.
WE MAY BE UNABLE TO OBTAIN PRODUCT FROM LABELS OR STUDIOS
The major labels and studios produce most of the music and video product.
Our success depends upon our ability to obtain products in sufficient quantities
on competitive terms and conditions from each of the major labels and studios as
well as from thousands of smaller suppliers. We are also dependent upon the
quality of new releases from our suppliers. We do not have long term contracts
with any supplier for our Full-line Distribution or New Media business groups.
If we cannot obtain sufficient quantities of product or quality new releases
from the major labels or studios or a significant number of other suppliers for
our Full-line Distribution and New Media operations, our financial results could
be adversely affected.
Distribution North America maintains contracts with most of the suppliers it
represents. These contracts typically range in length from one to three years.
If Distribution North America were unable to maintain its distribution
relationship with any of its large suppliers, our financial results would be
adversely affected.
WE EXPECT THE GROWTH RATE OF OUR NEW MEDIA SALES TO DECLINE
Our New Media sales continue to grow at a substantial rate as compared to
prior periods. We expect the rate of such growth to decline, however, as
compared to those prior periods, primarily because our growth rates for the
prior periods were based on comparisons against the relatively small
16
<PAGE>
sales volumes we experienced before the Internet gained significant acceptance
as a medium for commerce.
OUR SALES COULD BE ADVERSELY AFFECTED IF WE LOSE ANY OF OUR LARGEST
CUSTOMERS
If any of our largest customers were to stop or reduce their purchasing from
us, our financial results could be adversely affected. During the first half of
fiscal 2000, our top three customers accounted for approximately 33% of our net
sales.
OUR INFORMATION SYSTEMS COULD FAIL BECAUSE OF PROBLEMS RELATING TO THE
YEAR 2000
Our information systems could fail or provide erroneous output when
referencing dates subsequent to December 31, 1999 due to year 2000 processing
problems. In addition, as we provide electronic data interchange with our
suppliers and customers, difficulties with 21st century dates in our customers'
or suppliers' information systems could adversely affect our information
systems, and vice versa. Such failures or errors could occur prior to 2000. If
we or our electronic data interchange suppliers and customers are unable to
update our systems successfully to eliminate this problem, we may be prevented
from using some or all of our information systems or exchanging data with our
customers or suppliers. This, in turn, could disrupt our business and have a
material adverse impact on our financial results.
TRENDS IN THE VIDEO RENTAL MARKET COULD HURT OUR SALES
Studios and full-line distributors have instituted programs to increase the
quantity of copies of popular video rental titles stocked by retailers. We
believe that these programs have accelerated a shift in the market away from
independent video rental stores and small chains in favor of the larger chains.
Since, in general, full-line distributors play a larger role with independent
retailers than with the larger chains, we believe that the market may contract
for full-line distribution of video rental product. In addition, while most
full-line video distributors have elected to participate in revenue sharing
distribution arrangements to help increase the quantity of copies of titles
available from the major studios, we have not. In doing so, we risk losing
market share to other distributors.
NEW DELIVERY TECHNOLOGIES COULD DIMINISH OUR ROLE IN THE DISTRIBUTION
PROCESS
Music and video are currently marketed and distributed primarily on a
physical delivery basis through wholesale and retail distribution. In the
future, if products are marketed, sold and delivered by labels or studios
directly to stores or homes through electronic downloading or live streaming,
current methods of wholesale and retail distribution could decrease or be
eliminated. Microsoft, RealNetworks and others offer streaming technology, which
allows users to listen to, but not record, audio and video. In addition, digital
distribution has begun on the Internet utilizing various coding compression
technologies that allow downloading and replication of any digital audio
product.
The major labels and others have announced plans to develop a universal
standard for the electronic delivery of music with copyright protection. If
electronic distribution of music or video becomes widespread and displaces
significant demand for the formats we sell and we fail to play a significant
role in the electronic distribution market, our financial results would be
adversely affected.
In addition, cable and satellite television companies and others are
beginning to offer movies on a "near-video-on-demand" or other basis that allows
subscribers to order selected videos for in-home viewing. To the extent that
these programs achieve a broad level of acceptance, the market for physical
video product sold or rented by retailers could decline. This would reduce our
sales of video product.
17
<PAGE>
WE HAVE SIGNIFICANTLY INCREASED OUR INFRASTRUCTURE
The WDC move caused a significant increase in our infrastructure costs. If
sales growth does not continue, we may not be able to gain the planned
incremental efficiencies. By increasing our fixed costs, any erosion in sales
versus current or expected levels could increase our selling, general and
administrative expenses as a percentage of net sales.
WE MIGHT HAVE INVENTORY RISK DUE TO AN INABILITY TO RETURN PRODUCTS
We bear inventory risk associated with the financial viability of the
independent labels and studios from which we purchase product. If a label or
studio cannot provide refunds in cash for the inventory we desire to return, we
may be forced to expense such inventory costs. Further, we often experience
higher return rates for products of financially troubled labels and studios. If
we fail to manage our inventory to avoid accumulating substantial product that
cannot be returned, our financial results could be adversely affected.
WE MAY BE LIABLE IF OUR SUPPLIERS FAIL TO COMPLY WITH COPYRIGHT LAWS
Substantially all of the music and video products we sell are subject to
copyright laws and licenses that limit the manner and geographic area in which
such products may be sold. Any sales of product in violation of such laws and
licenses by us could subject us to monetary damages or confiscation of such
product. We distribute thousands of titles from different artists over numerous
jurisdictions and rely primarily on our suppliers to ensure that such titles
comply with the copyright laws, some of which may be conflicting or not clearly
developed. Although we have not experienced a material loss due to copyright
violations, we could be damaged in the future by copyright violations.
WE MAY BE PREVENTED FROM DISTRIBUTING MUSIC INTERNATIONALLY
Most of the major labels have adopted policies restricting the export of
their merchandise by domestic distributors. However, consistent with industry
practice, we distribute music of the major labels internationally. Our
international net sales of music for the first half of fiscal 2000 were
approximately $17.1 million. We would be adversely affected if a major label
enforced any restriction on our ability to sell music outside the United States.
In addition, although our international sales are denominated in dollars, our
international sales volume can be adversely affected by appreciation of the
dollar relative to foreign currencies.
TIGHT LABOR MARKETS COULD REDUCE OUR ABILITY TO ATTRACT AN ADEQUATE NUMBER
OF EMPLOYEES OR FORCE US TO INCREASE OUR COMPENSATION LEVELS
Low unemployment levels in the markets in which we operate could impede our
ability to attract an adequate labor force thus impeding operations. The tight
labor markets could also lead to our increasing our expenses for wages, benefits
or employee amenities.
WE MAY HAVE INSUFFICIENT ACCESS TO FUNDS IF WE FAIL TO COMPLY WITH THE TERMS
OF OUR CREDIT AGREEMENTS
We have a revolving credit agreement and several equipment credit agreements
that are secured by substantially all of our assets. As of October 2, 1999,
borrowings of approximately $162.1 million and $10.7 million were outstanding
under the revolving credit agreement and the equipment credit agreements,
respectively. The revolving credit agreement is used for general working capital
purposes while the equipment credit agreements provide financing for specific
fixed assets.
As a result of our substantial leverage we will incur significant interest
expense and principal repayment obligations, our ability to obtain additional
financing in the future may be limited, and our
18
<PAGE>
ability to compete through expansion, capital improvements and flexibility in
response to changing industry conditions may be limited. The credit agreements
contain numerous restrictive covenants, including limitations on our ability to
acquire or invest in other businesses and requirements that we comply with
certain financial covenants.
If we fail to comply with the terms of the credit agreements or obtain
waivers from such obligations, we could trigger an event of default under the
credit agreements. An event of default could permit acceleration of indebtedness
under the credit agreements that contain cross-acceleration or cross-default
provisions.
Our cash flow and capacity needs change significantly during the year, with
the heaviest credit needs and highest capacity requirements typically occurring
during the third fiscal quarter. If we do not have sufficient finances to
purchase the inventory required or the distribution capacity to distribute
product in a timely and accurate manner during such seasonal peak periods, our
financial results could be adversely affected.
THE MARKET PRICE OF OUR COMMON STOCK COULD FLUCTUATE
Many factors could cause the market price of our common stock to fluctuate
substantially, including (i) future announcements concerning us or our
competitors, (ii) variations in operating results, (iii) loss of a key supplier
or customer, (iv) technological innovations such as changes in physical product
formats or delivery technologies, (v) changes in product pricing policies by us,
our suppliers or our competitors and (vi) changes in earnings estimates by
securities analysts. These fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price of
our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks primarily from changes in U.S.
interest rates. The Company does not engage in financial transactions for
trading or speculative purposes.
The interest payable on the Company's revolving line of credit is based on
variable interest rates and is therefore affected by changes in market interest
rates. If interest rates on variable rate debt rose 0.79 percentage points (a
10% change from the average interest rate as of October 2, 1999), assuming no
change in the Company's outstanding balance under the line of credit
(approximately $162.1 million as of October 2, 1999), the Company's annualized
income before taxes and cash flows from operating activities would decline by
approximately $1.3 million.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings that arise in the ordinary
course of business. While the outcome of our pending legal proceedings cannot be
predicted with certainty, we believe that none of such proceedings, individually
or in the aggregate, will have a material adverse effect on our business or
financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended October 2, 1999, two employees of Valley exercised
options to purchase 3,128 shares of common stock under Valley's 1994 Stock
Option Plan and Amended and Restated 1997 Stock Option Plan at a weighted
average exercise price of $4.16 per share. These issuances of securities were
deemed exempt from registration under Rule 701 of the Securities Act of 1933, as
amended.
19
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Shareholders' Meeting on July 23, 1999.
(b) The shareholders voted for two directors for three-year terms. The vote
was as follows for each of the nominees:
<TABLE>
<CAPTION>
NAME AFFIRMATIVE VOTES VOTING AUTHORITY WITHHELD
---- ----------------- -------------------------
<S> <C> <C>
Robert R. Cain 6,900,196 11,860
Lawrence Archibald 6,898,948 13,108
</TABLE>
(c) (1) The amendment and restatement of the Company's 1997 Stock Option
Plan was voted on and approved. There were 6,737,870 votes for, 125,445
votes against, 18,635 abstentions and 30,106 broker non-votes.
(2) The selection by the Board of Directors of Deloitte & Touche LLP,
independent public accountants, as independent auditors of the Company
for the year ending April 1, 2000, was voted on and ratified. There were
6,896,995 votes for, 5,563 votes against, 9,498 abstentions and no broker
non-votes.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- ------------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(B) REPORTS ON FORM 8
No reports on Form 8-K were filed during the thirteen weeks ended
October 2, 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
VALLEY MEDIA, INC.
By: /s/ ROBERT R. CAIN
-----------------------------------------
Robert R. Cain
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 9, 1999
By: /s/ J. RANDOLF CERF
-----------------------------------------
J. Randolf Cerf
CHIEF FINANCIAL OFFICER AND
ACCOUNTING OFFICER
Date: November 9, 1999
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 382
<SECURITIES> 0
<RECEIVABLES> 171,801
<ALLOWANCES> (9,415)
<INVENTORY> 220,545
<CURRENT-ASSETS> 390,857
<PP&E> 41,575
<DEPRECIATION> (13,247)
<TOTAL-ASSETS> 435,051
<CURRENT-LIABILITIES> 359,959
<BONDS> 6,673
0
0
<COMMON> 8
<OTHER-SE> 65,556
<TOTAL-LIABILITY-AND-EQUITY> 435,051
<SALES> 205,186
<TOTAL-REVENUES> 205,186
<CGS> 180,648
<TOTAL-COSTS> 180,648
<OTHER-EXPENSES> 20,403
<LOSS-PROVISION> 405
<INTEREST-EXPENSE> 3,157
<INCOME-PRETAX> 573
<INCOME-TAX> 238
<INCOME-CONTINUING> 335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
